$500 Reward for New Brokerage Accounts at OptionsXpress

This is a really great incentive, but time is very short.

If you open a brokerage account at OptionsXpress and fund it by the end of November, keep an average $500 balance for six months, and make one trade, they will deposit another $500 in the account. Now that's worth doing!

Here are the details.

The wording on that page is ambiguous about when funding is needed, so I called them. They did say it needs to be funded immediately to qualify, but they said the funding deadline had been extended to December 1 because November 30 is Sunday. This means you have to do a wire transfer. Might as well go to your bank Friday, just in case.

Welcome to 1987!

This is pretty amazing.

Since October 1, we have essentially seen a slow-motion version of the 1987 stock market crash, declining about the same amount (in the range of 20% on the Dow).

And since a year ago, we have seen a slow-motion version of the entire 3-month top-to-bottom move of 1987, in the neighborhood of a 40% decline on the Dow.

Welcome, ladies and gentlemen, to history. Sit down, take a deep breath, and reflect on what we are seeing. Decades from now, people will be referring back to the "crash of 2008" or something to that effect.

That doesn't mean it's over. My sources are generally looking for even more pain before it's all done. We are seeing forced selling by hedge funds and other overleveraged traders. Each wave of declines triggers more margin calls, which result in more selling until traders are sufficiently deleveraged (i.e., they sell enough to bring their level of borrowed money down to earth).

The Way Of The Moose

It's been way too long since my last post, but I've been really, super busy. However I saw something the other day that I just had to pass along.

If you know where to look, you can get some valuable free investment and trading advice. One of my favorite sites is Decision Moose. Every weekend, he updates his advice on which one of several ETFs to own. He posts his complete track on the site, and it calculates to about 30% gains per year, compounded, using only a few trades a year. That's an impressive record, especially for free.

But even if you don't follow the signals, his weekly commentary on the markets and economy is hugely entertaining, and sometimes laugh-out-loud funny. For instance, from this past weekend here are a few choice gems:

The Moose is not into finding bottoms except during rutting season, and the older I get, the further apart those seasons seem to be. Moreover, in my experience, the more talk there is about finding bottoms, the less likely a fellah is to be presented with one. And you can’t miss it-- everyone is talking bottoms up these days; not just the drinkers.

My thinking is, if an asset appears to be hitting bottom, there are usually several more attractive places to risk your money.

If we are now to assume July 15 is the real-and-final bottom, we're essentially speculating that an economic revival will commence around Inauguration Day, 2009.

Maybe it's just me, but that seems like a stretch, given one Presidential candidate who admits to knowing nothing about the economy, and another whose economic proposals, if implemented, will make Herbert Hoover look like a friggin' genius.

Fact is, the best bottoms are made of bulging red eyeballs, pulsing neck veins, and sweat-drenched dress shirts. Like unicorns, they do not come when you call them, but only appear when all hope of seeing one has vanished. Since the required abject hopelessness and maniacal despair is not yet in evidence, I need more convincing.

So it's not particularly surprising that his signal is currently in cash, and has been since March.

Check out the site every weekend and you'll gain both in money and insights.

Falling Interest Rates and Your Mortgage

Well, I've been so busy recently that I haven't posted. December often seems to be the busiest time of year -- and now it's time to do taxes.

I hope readers were able to take steps in advance, to profit from the lower interest rates as outlined in the last post. The economy and markets are weaker than most people expected, and the Fed has decided they'd better come to the rescue with aggressive rate cuts. Even with the two recent cuts totalling 125 basis points (1.25 percentage points), it's quite possible they will cut again at their next meeting in late March.

Although the economy won't really feel the effects of rate cuts for a few months, it's already helping some people as they rush to refinance their mortgages. It's helping others who have adjustable-rate mortgages because their rates won't adjust as high as they otherwise would.

By the way, I hope everyone has learned the lesson: When interest rates are low, it's not time to get an adjustable-rate mortgage. (In which direction do you think those low rates are gonna adjust?!) Even if rates are fairly high, it's a risk, and not to be taken lightly. Don't stretch to buy more house than you can afford, don't finance 90% or 100% of the house value, and make sure your mortagage doesn't have a prepayment penalty. Don't even buy a house unless you have a good emergency cash fund. These rules are basic, yet an enormous number of homeowners ignored them -- and are now paying the price. We all are paying with them, as neighborhoods become saturated with foreclosures, lenders become reluctant to make new loans, and the economy slows.

In other words, there's a lot to be said for the traditional fixed-rate mortgage. As interest rates fall, get ready to refinance if you can get a better rate, or if you currently have an adjustable rate.

Next time: Is it time to refinance right now?

The Mortgage Crisis, Part 3 - Can you take advantage?

Because of all the bad loans, which have created ripple effects through the real estate, banking, and homebuilding/home improvement industries, the economy is undeniably slowing, and it could result in a recession in 2008. However, most of my sources say we will probably escape without one.

The reasons? I can think of a couple offhand: Vigorous exports, helped by the falling value of the U.S. dollar; and lower interest rates.

A lot of people ary saying "No bailouts" and "let the chips fall where they may -- let the stupid borrowers be foreclosed on, let the stupid lenders go out of business, and let the stupid investors lose their shirts." The problem with that is, it's affecting the entire economy, in a snowballing effect. The Federal Reserve took basically that approach in 1929-1930, refusing to lower interest rates or engineer massive bailouts, until the it was too late and the Great Depression was irreversible. Federal Reserve chairman Ben Bernanke has made a career-long study of this sad episode in American economic history, and is determined not to repeat it.

My sources indicate that this is affecting the economy enough that the Federal Reserve isn't finished cutting interest rates. By now, just about everyone expects they will cut at least .25% next week. And in fact, many are saying they could cut by .50% (although that's somewhat less likely after today's fairly decent employment report).

Next year it's likely we'll see additional rate cuts. For instance, see this article.

Lower interest rates will not only stimulate the general economy, but it will also help these adjustable-rate mortgages not to adjust quite so much, and help borrowers refinance at better rates. You've heard on the news that there are agreements for lenders to freeze some of these existing interest rates for a while. It appears more agreements are also coming. This will give the Federal Reserve some more breathing room and time to lower rates enough to make more of a difference.

How do you take advantage of this?

• Consider moving some of your "safe money" out of money market accounts and into CDs that lock in your interest rate for a year or two, maybe more.



• Consider postponing refinancing your mortgage for several months, anticipating lower rates.



• As always, wait till June to decide whether or not to consolidate student loans (because you can only do it once, unless you have a new loan to include in the consolidation). Then you'll know what the new (lower) interest rate is, and you'll have a better idea whether or not they might continue even lower -- and then you can still wait till the following June to repeat the process.



• Consider buying long-term Treasury bonds, whose price will rise as interest rates fall. Actually this would have been a lot better to do in June, because they've been rising ever since then. But if rates keep falling, you should still get some benefit.



• Lower interest rates will also help the U.S. dollar continue its downward move. To take advantage of the declining dollar, invest in companies doing a lot of business overseas -- or invest in the overseas companies themselves.



• Combining the prior two ideas, consider investing in foreign bonds (denominated in strong currencies such as the Euro).

Surprise Rate Cut?

Sorry, it's been a while since my last post becaue I've been very busy. Today I just want to briefly talk about the markets. Of course they have been quite unsettled recently. Many indicators are saying buy, but others are still on sell signals.

The Federal Reserve could be the wildcard here. More and more people are expecting an interest rate cut after the September 18 meeting of the Federal Open Market Committee (FOMC). If they cut rates, the market will likely jump sharply. If they don't, the market will likely drop sharply.

My sources are generally expecting a cut. Possibly multiple cuts in the next few months.

But watch out for a potential surprise rate cut before the meeting. Last Friday's employment report makes this more likely, although of course not certain.

If you are playing the market on the short side, this could lose you a lot of money real fast. I'd be very careful of going short at this juncture.

Dow Drops, But Small-Caps Fall Off A Cliff

I've been telling you that my sources say to concentrate on the big multinational corporations such as those in the Dow Jones Industrial Average, and high tech stocks. Well, just about everyone knows the Dow fell sharply last week (about 4.6%), but consider this: the Russell 2000 small-cap (i.e., small company) stock index fell about 8.7%. Meanwhile the Nasdaq 100 was similar to the Dow, at about 5.2%.

Looking at it another way, the Dow has now lost all it gained in the last month. But the Russell 2000 lost all it gained in over four months.

I'm not here to tell you whether to buy or sell right now, but the small-caps still look a lot worse than the big ones. One longer term indicator (the monthly MACD) has actually signaled a sell on the Russell, but is still positive on the other major indexes.

Generally after the market drops like this, it finds its footing for a bounce, and then revisists the lows. At that point if the lows hold, things will look more positive. But if they don't, then we could be in for something worse.

Also remember we're not in the most positive time of year either. Often the period from mid-July through mid-October is weak.

The Market Fools the Bears

Yes, in early June the market was "teetering on the brink of a larger correction" as I posted then. I noted that it's been to the brink and pulled back from that brink before, and sure enough, that's just what it did. Then the last week of June it went to the brink again, only to pull away again.

When a market advance gets to the "overbought" stage (having risen relatively far and fast), generally it has to take a rest. It can do this either by declining or consolidating. In June the Dow went into a 400-pt consolidation, bouncing up and down within that range. It was unclear which way the stalemate would be resolved. In some cases, sell signals turned into buy signals and then went back to sell again.

The big 283-point advance last Thursday was certainly a positive. The Nasdaq continues to do even better than the Dow. The big multinationals, and high tech stocks, continue to lead the market as I have emphasized in the past. For example, a popular ETF for semiconductor stocks (SMH) has outperformed the S&P 500 by 2-to-1 this year.

Traders aren't quite sure what to make of this market, but most of the indicators I watch turned positive within the last 10 days or so. Longer term indicators never did say to sell.

Here is a sampling of information I'm getting right now:

• Many newsletter writers are bearish, which actually is bullish for the market. In fact, at the start of trading last Monday we were facing the heaviest S&P 500 shorting in 5 years. So of course the market fooled all those bears. It's quite good at fooling the majority.



• The breakout from the trading range could move the Dow about 1000 points in whichever direction the breakout occurs. [And it occurred to the upside.]



• Big traders and hedge funds are borrowing Yen at near-zero interest rates and buying stocks, and until the Yen starts increasing, that will continue. But when the Yen moves up substantially, watch out.



• Fewer stocks are rising. [This is typical behavior before the general market goes into a correction.] But those stocks with good earnings will attract more and more investors, pushing them up even more. Those are the stocks you want to own right now. Strong earnings can still buck the overall trend. We are entering the period of quarterly earnings reports now; expect a number of pleasant surprises in those earnings.



• Late June into the first half of July is typically a strong period for the market. But the 2nd half of July is typically weak.



• One short-term target (days to weeks) shows the Dow climbing another 250 points from here. A longer-term target (weeks to months) puts the Dow at 15,000 (up 1,100 points from here).



• The market is quite over-complacent and vulnerable for a move lower.

So it looks like it's not time to sell, but it is time to maintain some caution.

On The Brink Of A Correction

After some sizeable down days in the market, it is teetering on the brink of a larger correction. Nothing is for certain (it's been to the brink and pulled back from that brink before), but the there have been numerous signs accumulating that the market's steep uptrend was due for a breather. (In fact a couple of sources I follow sold their holdings 2 to 4 weeks ago.) It just needed a trigger.

One immediate trigger last week was that New Zealand raised its interest rates. Of course they are a huge factor in the world economy (not!) but it was so unexpected that there was a knee-jerk reaction by traders apparently worried that it was a advance sign of interest rate hikes in more significant currencies, such as maybe the Euro and perhaps even the U.S. Dollar.

There has definitely been some damage done, and a number of sources are telling me their market analysis methods are giving sell signals in the intermediate time frame (an outlook of weeks rather than days). It's not unanimous, but enough to provoke more caution. Often in these cases the market will bounce around for a week or two before the trend either continues or reverses.

Here are a few representative things my sources are saying:

• We could get another bounce. We are likely to see several days of consolidation and then another drop of about 5%.



• Last week the Dow closed below the low of the high week of the uptrend. (In other words, two weeks ago the Dow reached its highest level of the trend. The low of that week was about 13,456. Last week we closed below that level). When this happens, it fires off a sell signal on a lot of "black box" institutional trading systems.



• We have a majority of timing systems short. The preponderance of systems remain unmoved by the rally on Friday. You should at least consider standing on the side lines here even if you don't play the short side. That being said, we will have to watch some more to see what kind of correction we have going here.

By the way, one system I watch gave a sell signal on the S&P 500 and the Russell 2000 Thursday, but not on the Dow nor the Nasdaq 100. Even though those signals were so borderline that they were negated Friday, this is another indication that the large multinational companies seem to be doing better than their smaller brethren.

Market Advance Looking Tired

What I'm hearing now is that the market is extended and getting tired. Risk is increasing. Even though it's still going up, a correction is getting more and more likely to happen soon.

But the other part of the message I hear is is that afterward, things still look pretty good for the rest of the year.

And the consensus continues to be that the best opportunities are in big multinational companies, foreign companies, and high tech.

Donate Stock to Save Taxes

So you've finished your taxes (or gotten an extension), and you're wondering how to save tax money next year. Here's one easy way.

I've alluded to this in previous posts, but haven't given the details. If you donate money or goods to charity, you get a tax deduction (if your total itemized deductions are high enough to exceed the standard deduction). But if you donate appreciated stock, it's even better.

Say you have stock you bought for $1,000, and now it's worth $2,000. If you sell it and donate the proceeds, you have to pay tax on the $1,000 gain, but you get a deduction of $2,000. However, if you just donate the stock outright, you pay no tax on the gain but you still get the $2,000 deduction. It's like getting a double benefit.

Of course there are certain rules. The most important one is that you must have held the stock for over a year.

To do this, just contact the charity and find out their broker and account number. Then contact your broker and have them transfer the stock directly to the charity. Most brokers will do this, and they have a special form to fill out.

A few specialized brokers, such as my favorite, Interactive Brokers, won't do this. But you can first transfer the stock to a "general purpose" broker that does allow it, and then transfer from there to the charity.

Signs of a Positive Market

The Labor Dept. employment report Friday showed big job gains and a drop in unemployment. Traders are already celebrating; stock index futures are solidly higher in Sunday evening trading.

What I'm hearing now is that although it would be unlikely for the market indexes to just keep on higher without one more downside scare, that doesn't mean it's impossible. The market always likes to fool the maximum number of people, so we may not get that final decline (or at least, not till later).

More than one of my sources are saying it's time to buy, at least partial positions, and at least for the next couple of weeks. They are generally also looking for gains between now and year-end, no matter what happens in between.

The Market Can't Make Up Its Mind

OK, this week was down, and the weekly MACD indicator is still saying the trend is downward. I'm still hearing the market should be choppy for a while longer, and is likely to revisit the recent lows if not break them.

However, now we are entering a seasonally strong week and month, if historical norms are believed. After the recent selling, a short-term bounce seems likely.

Stocks with strong earnings should come out of this OK. In fact, Louis Navellier, who runs top-rated advisories such as the Blue Chip Growth newsletter, says that as far as his stocks are concerned, if you sold some, you should be fully invested by April 6, before the latest quarterly earnings reports start coming out in earnest.

For those who want to be more active, the market signals are pretty mixed, as they were last week. One possible approach is to buy strong stocks and simultaneously short weak stocks. There are many possible criteria (screens) for selecting each group. Lately I've been trying out the VectorVest service, and it looks pretty good. They have a number of different preselected screens.

Eventually the market will break out one way or the other, and establish a new definite trend. But that time is not yet, so position accordingly.

The Fed Juices the Market -- Which Way Now?

The stock market was juiced by optimistic interpretations of the Federal Reserve's statement last Wednesday. Many traders, having expecting further weakness, were forced to cover shorts as the buying accelerated.

The market is in a somewhat confused state. On the one hand, most of my sources are still expecting the indexes to retreat further before resuming their uptrend. On the other hand, one can't deny the upward momentum shown by the major indexes. In fact, normally you don't see more than about 68% retracement of a move if that move is going to continue, but the S&P 500 has now recovered about 76% of its decline from the 2/22 intraday high to the 3/14 intraday low. The weekly MACD is still saying sell, but its daily version (shorter term) is saying to buy.

So what to do with these mixed signals? My sources are similarly mixed, so I don't have too much concrete informatino to pass on. It's probably not a time to buy or sell strongly, unless you are following a system that has a history of giving good results. For now, a middle-of-the-road approach would probably be logical to match the market's middle-of-the-road action.

For some, middle-of-the-road could mean going to cash (or staying there). Longer-term the market still looks OK, so some buying of conservative stocks could fit. But you probably want to keep some cash because those same stocks could be cheaper soon.

Or try looking for stocks that have rebounded strongly from the recent weakness. Even though the market averages are still below their late-February levels, some stocks have surpassed those values and gone to new highs.

Generally the market needs to experience a little more "panic" than we've seen so far, before making a good bottom and resuming the uptrend. But as the old trader's saying goes, price is the final arbiter, and if you argue too much with it you'll go broke. One of my sources is saying they will buy if the market continues up significantly (but not while it just meanders up slightly like the last two days).

The MACD is a good indicator, but not perfect (nothing is). For one thing, it lags behind the price action, giving somewhat delayed signals. But it does catch up. If the market continues on an upward path, the weekly MACD will give a buy signal before too long. And I suspect you won't miss too much if you wait till that point before becoming fully invested.

Is It Safe To Buy Stocks Again?

Many market analysts study corporate profits, interest rates, the general economy -- these are called fundamental factors. Other analysts study stock price charts, their patterns, and various indicators calculated from market action -- these are called technical factors. For various reasons, technical factors can often tell you more about market conditions than fundamental factors, especially in the short term.

One good way to help you figure out what's going on in the market is a commonly used technical market indicator called the MACD (that stands for Moving Average Convergence-Divergence). It's not perfect (no indicator is), but if you plot it on a weekly chart, the overall state of the market becomes much more apparent.

You can do this on many free charting web sites; my favorite is JavaCharts from prophet.net. Here are the steps to follow:

1. On the JavaCharts web page, first enter the symbol to chart. For instance, on this site the S&P 500 index is $SPX.

2. The next pulldown list determines the kind of chart. The simplest option is to leave it as a line chart, which shows the closing price every period. You can experiment with the other styles to see the difference; for example, bar charts and candle charts show the opening price, high, low, and close for each period.

3. In the next pulldown list, choose the desired time duration for the entire chart; for instance, one year.

4. In the next pulldown list, choose the period for each data point. For this example we are using "W" which produces a Weekly chart; i.e., there is one point on the chart per week.

5. Right-click inside the chart and choose Studies -- Apply Studies. Click the pulldown list entitled "Select Studies" and choose "MACD (2 lines)". Then click Close.

6. You now see an area below the main chart, whose main feature is two lines. On mine, there's a solid blue line and a dotted red line. Now look at where the lines cross -- those are the signals. There are variations in how to use this indicator, but the simplest way is, when the main line crosses below the dotted line, sell. When the main line crosses above the dotted line, buy.

Notice this signal gave a sell signal in May 2006, soon after the market started on its steep drop into the summer. Then it gave a buy signal in early August, soon after the market launched a powerful rally that ultimately gained nearly 18% in 7 1/2 months.

Please note that even though this indicator is pretty good, these are not standalone buy/sell signals and should be considered in combination with other indicators and market conditions. Still, you could do a lot worse than making the MACD a major guideline. The longer chart periods, especially weekly and monthly, are more reliable than shorter ones like daily and intraday.

Note that the nature of the signal is reactive rather than predictive, so it would not have gotten you out before the recent drop. But it can help you recognize when the trend has changed and thereby help prevent further losses.

So what's it saying now? It went to a sell signal in late February (due to the recent plunge) and is still on its sell. So even though the market could rebound right away, the odds are against it. Bottom line, it's not yet safe to get back in the market.

This also agrees with other information I'm seeing that it's not yet time to buy. In fact, if you haven't sold already, you still have the opportunity to do so. Even though I don't think this will be a severe correction, you never know how far down it might go.

So now you have a tool which should make you a lot more comfortable about being in or out of the market. In general, signals using the weekly chart occur every few months. If you don't want to trade even that often, use a monthly chart (expanding the view to about 5 years or more, so you can see past signals better) instead of a weekly one. On the monthly chart, the MACD gave a buy signal for the S&P 500 back in May of 2003 and that buy is still in effect.

Markets Rebound, But Not Yet Out Of The Woods

The U.S. stock market was up this week, which indicates why I told you last week not to sell everything on Monday. Still, the information I'm getting says the odds favor another push down, to test and revisit the recent lows (and possibly lower) before we get a full recovery. The bounce might start failing this week, or a couple of weeks from now, but it likely will fail.

Last week I advised against short-term trading in general, but if you are uncomfortable with your level of investment then now you could sell some of your holdings (especially stocks that have not rebounded much). If you are building longer term investments, then the stocks you want are now on sale -- so start getting some of them. Some companies have already bounced back strongly, and those also should be on your shopping list.

When my sources indicate it's appropriate to be a more aggressive buyer, I'll pass the word along. In the meantime, keep some power dry.

The Market "Meltdown"

The stock market really got hit this week, losing essentially all its gains since Thanksgiving in a single day (Tuesday, February 27). In a way it seemed to come out of nowhere from a steady advance that started last summer, but actually we were long overdue for a decline of several percent.

All it needed was a trigger, and the trigger seemed to be some comments by former Federal Reserve chairman Alan Greenspan to the effect that the U.S. might enter a recession in 9 to 12 months. Hong Kong and China stocks plummeted, and the same effect traveled around the world throughout the trading day. This was promptly contradicted by the current chairman, Ben Bernanke, who said we were not headed for a recession, but the damage had already been done.

Who's right? The experts who seem most credible to me say no, we won't have a recession, but yes, we will have to go through a market correction -- not a crash. Companies are making good profits, and that after all is where rising stock prices ultimately come from.

This is scary, but if you are following good investing principles (including diversification, and that includes some bonds, which are going up) you should be OK. There is talk of a possible worldwide panic caused by forced selling of assets bought with borrowed money (especially borrowed Japanese Yen, due to their extremely low interest rates), but there's always some "doomsday scenario" to worry about and it's just the latest.

So is it time to buy, or to sell? Well, it's very unlikely that we're at the bottom. Estimates for this correction range from 2 weeks to 6 months, and from 5% to 17% down from the recent peak. Nobody really knows of course, but there definitely is damage in the market that will take some time to repair.

But dumping your investments first thing Monday morning is probably not the best thing to do either. First, if you sell, you have to know when to buy it back. Almost nobody can get this right! It's psychologically almost impossible to pull off. Second, we will probably have a bounce in the next few days, which will present a better selling opportunity. Third, there are tax implications in selling.

But you could trim some of your investments, particularly the ones that aren't acting well, and buy better ones later. (What kind? Everything I hear says buy large blue-chip growth stocks.) Selling little by little, and buying back little by little, is psychologically easier.

Instead of selling things, you could hedge by buying some of the inverse mutual funds or ETFs (exchange-traded funds) such as the ones sponsored by Rydex and ProShares. The inverse funds go up when the market goes down.

But again, don't go all out. Whenever you make a big buy or sell, that's when the market will reverse on you. Humans are psychologically programmed to do precisely the wrong thing; that's why profitable short-term trading is so extremely hard.